This morning Prime Minister Trudeau announced that provinces have until 2018 to implement a carbon pricing scheme and, if not, the federal government will step in and impose a price for them. How much is it, what happens to the revenue raised and what will it do to the price of the basics (gasoline, electricity, natural gas, crude oil and crops)? We take a look.

 

 

If you want the short version - here it is;

The amount: If a federal price is imposed then it will be $10 per tonne of carbon dioxide in 2018 rising at $10 annually to $50 per tonne in 2022.

Gasoline. the cost per litre of fuel will start at 2.35 cents in 2018 rising to 11.35 cents in 2022: both amounts are a fraction of the current price of gasoline.
Electricity.The impact on power prices could be even less - i.e. zero - if Saskatchewan electricity consumers are ever given the ability, common in an increasing number of jurisdictions across North America, to choose to have their electricity generated by non-emitting sources like wind, solar or hydro.
Natural gas. A 2018 carbon charge would increase the average residential gas bill by about 5 percent assuming current natural gas prices. However it is important to note that those prices are at historic lows: they are liable to rise in the future and, when they do, the carbon charge will be a smaller part. 
Crude oil.  The carbon charge would not be paid on the total carbon content of oil and gas and would instead only be payable on emissions to the atmosphere which occour during the production and refining process. The carbon charge arising represents just over 1 percent of the total sales price of crude oil. It is of note that crude prices are currently trading at very low historic levels: if they rise the carbon charge will form an even smaller part of the total. 
Agriculture. A $10 per tonne carbon charge would represent less than 1 percent of gross revenue achieved from crop export sales in 2014.

The overall tax burden is unchanged. But the really important thing is that all carbon taxes raised will stay in Saskatchewan. So what Premier Wall should be doing is reducing taxes elsewhere (Income tax? PST?) such that there is no change to the total taxes anyone pays during the year. Given some of the confusion over this point it was specifically clarified by the Federal Minister of Public Safety (Ralph Goodale) "Every single penny remains in Saskatchewan and under Saskatchewan's control. Every cent."

For the details behind these numbers: read on;

 

 

FUEL. When a litre of gasoline is burned it releases 2.35 kilograms of carbon dioxide. In other words the carbon tax on each litre will, in 2018, be 2.35 cents ($10 per tonne of carbon dioxide equals one cent per kilogram hence 2.35 cents per litre of gasoline). 

To put this amount in context the following graph illustrates the change in retail gasoline prices (in Regina) from 3 October 2012 to today: over that time they fluctuated from a low of 67 cents to a high of $1.35 per litre.

Source: GasBuddy.com - Regina Retail Price Chart

Source: GasBuddy.com - Regina Retail Price Chart

A word on the calculation: some folk have said it seems counter-intuitive that burning a litre of gasoline - which weighs less than one kilogram - releases more than two kilograms of carbon dioxide. The reason is that during combustion the carbon in the gasoline splits from very light hydrogen in the fuel and then combines with much heavier oxygen in the atmosphere.

ELECTRICITY.  Every kilowatt hour of electricity generated in Saskatchewan emits 0.65 kilograms of carbon dioxide on average. Wind and hydro do not emit any greenhouse gases however coal emits more than 1.1 kilograms per kilowatt hour - hence the 0.65 kilogram average.

The aforementioned carbon tax, starting at $10 per tonne or 1 cent per kilogram, therefore equates to a charge of 0.65 cents per kilowatt hour of electricity consumed. 

The average Saskatchewan household uses 680 kilowatt hours of electricity monthly and pays 15.7 cents for each one (see page 151 of SaskPower's 2015 Annual Report). This means the average monthly household electricity bill is $107 and average monthly carbon emissions are 442 kilograms. The new carbon tax will therefore add $4.42 monthly in 2018 rising to five times that amount ($22.10) in 2022.

However if your electricity doesn't emit carbon when it's generated then no carbon tax is payable. Sound crazy? Not so much.
In an increasing number of jurisdictions across North America and Europe, electricity consumers are able to choose how their electricity is generated: wind, solar or hydro-electric. Indeed this program (Green Power Billing) used to exist in Saskatchewan until it was cancelled suddenly by SaskPower in 2013.
Since wind energy is cost competitive with the cheapest alternative (natural gas); a program like this means electricity consumers using wind energy would pay no more for their electricity AND, since they have no carbon emissions, would pay nothing for them.  This is exactly the sort of behavior carbon charging is designed to encourage. It also, given the entrenched institutional and political resistance to charging carbon emitters in this province, probably explains why SaskPower's Green Power Billing program was terminated and has yet to be replaced.

NATURAL GAS. Look on your home natural gas bill and buried somewhere in there will be a charge for the natural gas itself which is usually expressed in $ per cubic metre of gas. Typically the price is $0.18 or 18 cents per cubic metre.  When a cubic metre of gas is burned it releases 1.9 kilograms of carbon dioxide. With a carbon tax cost of $10 per tonne (i.e. 1 cent per kilogram) that means the price of your gas will  rise from $0.18 per cubic metre to $0.20 or an increase of 11%. However the cost of natural gas is usually only about half of the total bill - the rest is made up of distribution charges etc - hence a carbon charge of $10 per tonne represents an increase of 5 percent on the typical natural gas bill.

In the following chart we've tried to give an idea of the relative impact of the 2018 carbon tax on your bill. We've taken the actual historical natural gas price (blue line) and compared it to what the price would have been had the $10 carbon charge been included (orange line);

Source: Natural Gas price data ex US Energy Information Administration (Natural Gas Annual). US/CA Forex Rate - annual average ex Bank of Canada

The data is not inflation adjusted - in other words historical gas price information would have been higher had an inflation adjustment been applied.

CRUDE OIL.  There is a view in certain quarters that the carbon tax would be paid by the oil and gas industry on the carbon content of  all oil and gas which they extract. This is absolutely not the case. Instead the tax will only be levied on emissions to the atmosphere of carbon dioxide which occur during the extraction and refining of oil and gas.  
To put this in context consider that in 2014 (the last year for which data is available) the oil and gas industry extracted 30 million tonnes of crude oil and 5 million tonnes of 'crude oil equivalent' as natural gas. The gross revenue received by the oil and gas industry from the sale of those 35 million tonnes was a shade over $16-billion which is equivalent to $458 per tonne or $62 per barrel. (For the data wonks out there: this is from the 2015 Statistical Handbook of the Canadian Association of Petroleum Producers).
Canada's Carbon Dioxide 'National Inventory Submission' to the UNFCCC reveals total GHG emissions associated with the extraction and refining of that crude oil was 18.7 million tonnes which is equivalent to 0.5 tonnes per tonne of oil extracted or 73 kilograms per barrel. In other words, and with a carbon price of $10 per tonne, this equates to a 2018 carbon charge of $0.73 per barrel of oil extracted (and 5 times higher or $3.65 per barrel in 2022). The 2018 charge of 73 cents is equivalent to 1.1 percent of the 2014 average crude oil price of $62.
Many would think that sounds like not too much. If, on the other hand, it does seem like quite a bit then it's worth considering the following two points;

1. The Saskatchewan oil and gas industry has historically had little incentive to cause them to minimise their carbon emissions during production. This implies that, with a carbon price in place, the oil industry will have the ability to achieve significant emission reductions and, as a result, to pay significantly less in carbon tax. Indeed we have seen this with SaskPower and electricity generation: only a couple of months ago SaskPower's new CEO, Mike Marsh, announced plans to reduce power generation carbon emissions (using wind, solar and hydro) by 40 percent by 2030.

2. Crude oil is relatively cheap today. If it rises again in the future, which seems likely, then the carbon tax will become an even smaller percentage of the total.

Similar to what we did with natural gas; the following chart seeks to illustrate the relative impact of the 2018 carbon tax on the market price of crude oil. We've taken the actual historical crude price (blue line) and compared it to what the price would have been had the $10 carbon charge been included (orange line). The carbon charge is such a small part (1.1 percent) of the (highly volatile) crude oil sales price that it is hard to even see the blue line.

Source: Crude oil price data ex US Energy Information Administration. US/CA Forex Rate - annual average ex Bank of Canada

AGRICULTURE represents a significant part of the Saskatchewan economy: crop exports in 2015 ($15.2-billion) were worth almost as much as the total market value of oil and gas extracted ($16.1-billion).  

The most recent carbon emissions data available is for 2014 when the agricultural sector emitted 13.1 million tonnes of greenhouse gases or 17.5 percent of the province's 74.8 million tonne total. In other words and assuming the 2018 $10 per tonne carbon tax, those emissions would have increased costs by $130-million. How does this compare to the market value of agricultural products?
In 2014 Saskatchewan's total harvest (all grains) was 29 million tonnes of which exports of 27.9 million tonnes had a value of $13.9-billion. In other words a $10 per tonne carbon tax would represent 0.9 percent of gross export revenues.    Is this significant? It is worth considering the experience of British Columbia's carbon tax: The Effect of British Columbia's Carbon Tax on Agricultural Trade was compiled to assess the implications of BC's existing carbon tax on international trade in the agricultural sector and concluded "we find little evidence that the carbon tax was associated with any statistically significant effects on agricultural trade or competitiveness from 2008-2011.."

 

 

So there you have it. Not so bad really.